Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
September 21, 2000, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4440 words
COMMITTEE:
SENATE environment & public works
SUBCOMMITTEE: clean air, wetlands, private property,
and nuclear safety
HEADLINE: TESTIMONY DIESEL FUEL
REGULATIONS
TESTIMONY-BY: RONALD W. WILLIAMS ,
PRESIDENT
AFFILIATION: GARY-WILLIAMS ENERGY CORPORATION
BODY:
Statement of Ronald W. Williams President of
Gary-Williams Energy Corporation Before the Senate Environmental and Public
Works Subcommittee for Clean Air, Wetlands, Private Property and Nuclear Safety
September 21, 2000 Introduction Good morning, Mr. Chairman and Members of the
Committee. My name is Ron Williams. I am President, Chief Executive Officer and
an owner of Gary-Williams Energy Corporation, a Denver-based refining and
marketing company. Our primary asset is a 50,000 BPD crude oil refinery in
Wynnewood, Oklahoma. Companywide, we have about 275 employees and fall within
the definition of small business refiner used for the Heavy Duty Engine and
Vehicle Standards and Highway Diesel Fuel Sulfur Control
Requirements proposed by the Environmental Protection Agency in May of this
year. I have been asked to speak today on behalf of the oil and gas industry as
a whole. We are members of both the National Petrochemical and Refiners
Association (NPRA) and the American Petroleum Institute (API). NPRA represents
virtually all of the US refining industry; API represents all sectors of the
petroleum industry: exploration and production, transportation, refining and
marketing. In addition, we served as a representative of an ad hoc coalition of
some 15 small refiners producing diesel fuel during the SBREFA (Small Business
Regulatory Enforcement Fairness Act) panel investigation into the impact of
EPA's proposed rule on small business refiners. General Industry Concerns NPRA
and API have previously testified before this committee and have devoted
extensive resources to try to work with EPA and to analyze technical issues on
this proposed ruling. The industry as a whole firmly supports the clean air
benefits of lower sulfur fuels. At the same time, however, the
industry believes that the costs and benefits of these regulatory requirements
must be carefully weighed in the context of their impact on energy supplies and
the ultimate burden on consumers and the national economy. In short, we fear
that EPA's haste to promote very sensitive engine technology is prematurely
driving stringent and unreasonable fuel standards. We believe that a 15 ppm cap
on diesel sulfur (effective in April 2006) will mean a sharp
reduction of highway diesel fuel supplies, higher fuel prices and significant
market volatility. In addition to those in the fuel industry, the rule will hurt
all those who rely on highway diesel fuels, including truckers and distributors
of goods and services. Diesel-fueled trucks and buses are the backbone of
commerce in this country. The ultimate harm will be to consumers, jobs and the
economy. Among the key concerns shared by most of the refining industry are: 1.
The 15 ppm diesel sulfur cap proposed by EPA is unreasonably
stringent. To produce product consistently to that standard (allowing for
inevitable operational disruptions), a refinery must in fact set itself a much
lower cap. At least two things will happen: first, refiners choosing to produce
for the highway market will incur significant capital and operating costs and
consumers will experience about a 5% fuel economy loss; second, other refiners
will be forced to limit or forgo participation in the highway diesel market. As
a result, additional diesel volumes will be necessary just to match current
demand. 2. The US fuel refining and distribution systems will not be able to
expand to meet anticipated future demand. Refineries are now operating at over
95% of rated capacity which is approximately full sustainable capacity and this
rule will shrink existing capacity. Forecasts (by the Energy Information
Administration) are that US diesel demand will increase by 6.5% between now and
2007, gasoline demand will grow by 1.9% per year and jet fuel
demand will rise by 3.2% per year. (Note: jet fuel is made mainly from high
quality, light distillates and "competes" with diesel for blending components.)
3. Distribution problems will further reduce available supplies of ultralow
sulfur diesel fuel and restrict the industry's ability to
respond to any unexpected supply shortfalls. Potential for contamination in
pipelines, barges, tankers, etc. will constrain shipment schedules and require
more extensive interface cuts. EPA itself has suggested that some two percent of
highway diesel may be downgraded to off-road fuel because of a required increase
in pipeline transmix. 4. Importing additional diesel supplies to meet demand
will be restricted because foreign producers will be unlikely to meet our more
stringent sulfur standards. 5. Costs to meet a 15 ppm standard
will be significantly greater than EPA projects. According to EPA, costs for
diesel fuel under the new standard would be approximately three to four cents
per gallon higher. API, however, projects incremental costs of 12 cents per
gallon for diesel manufacturing ($8 billion in refinery capital investments) and
an additional two cents per gallon for distribution expenses. API estimates that
the capital costs to reach a 50 ppm standard (a 90% reduction in
sulfur levels from today's standards) would be six cents per
gallon higher than EPA forecasts but about half the outlay for the 15 ppm level.
6. Unable to make the huge investments required for a 15 ppm diesel cap and
facing additional massive expenditures to meet almost simultaneous new
regulations on gasoline sulfur, oxygenates and air toxics, some
larger refineries will move out of the highway diesel market. Some smaller
refineries will be forced to go out of business all together. The off-road
market will be flooded with higher sulfur diesel. API has
estimated that the shift away from on-road diesel could be in the 20 to 30
percent range. More production loss may result from refinery closures. Faced
with the high cost of regulation and low rates of return, more than 25 U.S.
refineries have already closed in the last ten years. 7. The industry is in
agreement that major supply shortfalls should be anticipated. Estimates range
from 10 to 30 percent of projected demand. A just-released Charles River
Associates (CRA) study suggests a nationwide average shortfall of more than 12%
with particularly acute supply shortages at the regional level. On road diesel
supply is projected to decline by 18% in Petroleum Administration for Defense
Districts (PADDs) I, II (where our Wynnewood refinery is located) and III and by
37% in PADD IV, relative to the DOE baseline forecast of market demand in 2007.
CRA estimates potential price increases in PADDs I-III of $0.54 to $0.80/gallon
and potential price spikes of $1.56 to $2.28/gallon in PADD IV should an
insufficient volume of imports be available to cover the loss of domestic
production. 8. The effective date of the proposed diesel rule overlaps the
period when refiners will be making major refinery modifications needed to meet
new Tier 2 gasoline sulfur requirements. In addition to the
major cost burdens imposed, almost simultaneous implementation of the standards
will exceed the capacity of available engineering and construction resources.
Industry Recommendations The refining industry has specifically urged EPA to
take three critical steps: - Conduct a thorough technology review (for engine
and emission systems as well as refinery desulfurization technology) before
finalizing the rule; - Set reasonable and cost-effective standards for vehicles
and fuels; - Set an effective diesel sulfur implementation date
that does not overlap the Tier 2 gasoline requirements. The
industry has no reason to believe that the Agency will respond to these urgent
recommendations without Congressional intervention. Small Refiners' Dilemma
Small business refiners share the same concerns as the majors with this
rulemaking, but our problems are much greater. There are fewer than 25 small
refiners meeting the EPA definition (fewer than 1,500 employees and total
capacity not exceeding 155,000 BPD). There are also numerous small refineries
owned by larger companies with significant crude oil production and/or
significant retail outlets which they also own or control. In some cases the
owners are in partnership with foreign producers such as Saudi Arabia and
Venezuela. In addition, they own other much larger refineries. The benefits that
these major companies enjoy from their sheer size, diversification and
integration are many: - Easy access to both debt and equity capital; - Lower
cost of capital; - Significant overhead savings and buying power with multiple
refineries (e.g. utilities, operating supplied, engineering services, etc.); -
Ability for one segment of their business to subsidize or "carry" another
segment; and - Enormous "staying power". For most of these major companies,
their refineries are viewed as part of an integrated system. For example,
several foreign producers have invested in US refineries to increase their
market share of crude oil imports. Historically, profits from the major oil
companies' crude oil production and retail marketing have subsidized the dismal
rates of return on their refining assets. Many of the larger companies have
publicly announced their desire to achieve a "balance" between the amount of
refining capacity they own and retail distribution outlets they own or control.
It is clear that the major oil companies' size, diversification and integration
create a formidable, competitive advantage over the small refiners. In short,
small refiners are less able to raise the necessary capital and to endure the
related increased operating costs which desulfurization investments will
require; we face proportionately higher costs because we do not enjoy the same
economies of scale; we cannot compete for limited construction and engineering
resources. Many of us are also faced with meeting stringent Tier 2
gasoline standards in approximately the same time frame. In our
case, for example, we estimate that Wynnewood refinery's capital costs to reach
15 ppm diesel sulfur will total approximately $48.5 million. In
addition, our annual operating and maintenance costs will increase $6 to $7
million, an amount equal to our historic annual net income. Clearly there would
have to be a significant increase in profit margins, which has not been the case
with past environmental investments. If we must comply with the Tier 2, Diesel
and Air Toxics rules as issued or proposed, according to our best estimates,
GWEC must finance capital expenditures totaling $87 million in a five year
period between 2003 and 2007. Not included in this total is an additional almost
$3 million capital expenditure which will be required by the fall of 2003 under
MACT standards expected to be released in the next few months. Importance of
Small Refiners in a Vibrant National Oil and Gas Industry Small business
refiners believe this regulation will irreparably damage the competitive fabric
of our industry and result in unnecessarily higher prices for diesel fuel
consumers. Several will go out of business. In our case, the impact of this
proposal is devastating and, if not amended, will ultimately cause us to shut
down our refinery. What then would result? The rapid and pervasive trend toward
megamergers in the industry will continue unchecked. There will be fewer if any
small independents able to provide competitive products and to challenge the
majors' price increases. Historically, small refiners have not only often been
the lifeblood of the small communities in which they operate, they have served
an essential function in providing pricing competition which requires the larger
integrated companies to better meet the needs of the consuming public. Often the
small independent provides the lowest wholesale price in the market for
gasoline and diesel. Also small refiners serve an essential
national security function. In 1998/99, for example, small refiners
(representing only about 4% of the diesel refining capacity in this country)
provided almost 20% of the military jet fuel used by U.S. Military bases. Small
refiners with defense contracts supplied almost 500 million gallons of jet fuel.
Extensive Effort Has Not Produced Comprehensive Small Refiner Solutions Small
refiners have worked diligently with the SBREFA panel and with EPA directly to
outline the complex range of problems and circumstances facing the small refiner
group and to underline as strongly as possible that there is no one solution
that will enable all small refiners to survive. Wynnewood Refining Company, for
example, is one of only a few small refiners without a distillate
desulfurization unit. Because of the strong local agricultural, ranch and oil
field markets, the additional desulfurization capacity has not previously been
necessary. Our many discussions with EPA staff, give us no reason to believe
that the final rule will include adequate accommodation for the majority of
small refiners. The apparent sensitivity of diesel engine technology now
contemplated and the Agency's headlong rush to impose a rule immediately mean
that there will be no opportunity for additional research and no incentive for
the development of alternative technologies that might be equally as effective
with slightly higher sulfur fuel. Preservation of the Small
Refiner Segment Small refiners concur with the industry position summarized
above. Like the industry as a whole, small business refiners are united in our
belief that the costs, technical difficulties and tight time frames imposed
under the proposed diesel rule will push the US refining industry to limit
production of ultralow sulfur highway diesel, cause supply
shortages and price increases and flood the off-road market with higher
sulfur product. This shift away from the on- road market will
be substantial as many refiners decide to drop their Light Cycle Oil (LCO) into
the off-road market rather than make the large capital investments required to
process the entire stream to a 15 ppm cap. The related glut in the off-road
market will reduce the price of off-road diesel and put many small refiners who
rely on that market, like Wynnewood Refining Company, out of business. As the
industry has pointed out, the rational and preferred solution is to delay
issuing the rule. If the Agency were to withdraw the rule to allow for more time
to complete the research and thoughtful analysis needed, a more thorough
investigation of highway diesel supply questions and antidumping provisions
could be undertaken and subsequently public comment could be invited. If,
however, EPA proceeds with the rulemaking, small refiners urge EPA to adopt
anti-dumping provisions in its final rule, to preserve the small refiner segment
and to mitigate the very real probability that the supply of highway diesel will
be reduced. One suggestion is to limit sales of high sulfur
diesel into the off-road market to a refiner's current volume or some
appropriate baseline. Additional sales into the off-road market would be
allowed, but the sulfur standard for incremental volumes would
be whatever cap is adopted. Small business refiners, who produce only about 4%
of the nation's diesel and who market almost exclusively in attainment areas,
would be exempt from this provision. This sort of anti-dumping provision would
provide certainty that the on-road market would be first priority and therefore
adequately supplied since there would be no economic incentive to dump
incremental diesel into the off-road market. Such a provision would have no
material environmental impact. In fact, because LCO is at the high end of
allowable off-road sulfur levels, without an antidumping
provision, off-road pollutants would probably increase. Access to Capital
Whatever provisions EPA adopts for small business refiners will not be
sufficient to keep all of us in business. We must have help to finance these
incredibly costly regulations. We ask that Congress and the Administration fully
realize the ramifications of this rule to the small refiner. The extraordinary
costs involved will result in small refinery shutdowns, and less competition in
the market place. If EPA is allowed to proceed, we ask that Congress and the
Administration consider providing tax credits, loan guarantees and other
provisions to assist small business refiners. For example, among the types of
assistance that should be considered: - $0.05/gallon excise tax credit or an
income tax credit for small refiners to defray costs of an investment in
desulfurization technology; and - Increase in SBA maximum loan guarantee on
pollution control loans from $1 million to $10 million or higher. Conclusion In
conclusion, the refining industry, including the endangered small business
refiners, believe that this rule must be subject to much more extensive review
than the Agency's current timetable will allow. Without some delay to allow the
complex analyses of engine technology, desulfurization technologies and costs
and supply disruption probability, this country can expect to see price spikes,
fuel shortages and consumer outrage that may make recent protests in the midwest
and Europe look mild in comparison. Thank you for the opportunity to express
these views.
LOAD-DATE: September 25, 2000, Monday